||The Moderating Role of Political Connection on the Relation between Transfer Pricing and Effective Tax Rate
||Department of Accountancy
effective tax rate
The study investigates the effects of transfer pricing on firms’ effective tax rates, and whether having a financial-economic political connections further moderates this relationship. Firms’ use of transfer pricing to avoid tax has long been an issue for the governments, this done by shifting the income to low taxation areas. Using data for Taiwanese firms from 2011 to 2013, the results show that firms in Taiwan use transfer pricing to have a lower effective tax rate. This result is consistent with theoretical expectations and prior research. Furthermore, this study explores whether a financial-economic political connection through the board use transfer pricing as a tool to achieve a lower tax rate, but did not find enough evidence to show that firms use transfer pricing through this kind of political connection, or any other levels of political connections. However, the results show that, in general, firms with political connections also have a lower effective tax rate. This is accordance with recent studies on two other Asian countries: Malaysia and China.
1. INTRODUCTION 1
1.1 Background 1
1.2 Motivation and purpose 3
1.3 Contributions of this study 3
1.4 Framework of this study 4
2. LITERATURE REVIEW 6
2.1 Transfer pricing 6
2.2 Effects of transfer pricing on tax 6
2.3 Effect of political connections on tax 7
2.4 Effects of stronger connections 9
2.5 Effective tax rate 10
2.6 Other factors that affect the effective tax rate 10
3. HYPOTHESES AND RESEARCH DESIGN 13
3.1 Transfer pricing and effective tax rate 13
3.2 Moderating role of political connection on effective tax rate 13
3.3 Research model 14
3.4 Variable definitions 15
3.4.1 Effective tax rate 15
3.4.2 Transfer pricing 17
3.4.3 Political connection 17
3.4.4 Control variables 19
4. RESULTS 21
4.1 Sample 21
4.2 Descriptive statistics 24
4.3 Correlation analysis 26
4.4 Empirical results 27
5. ADDITIONAL TESTS 30
5.1 Different political connections 30
5.2 Different effective tax rate measures 33
6. CONCLUSION AND FUTURE RESEARCH 36
6.1 The conclusion of this study 36
6.2 Limitations 37
6.3 Future improvements 38
7. REFERENCES 39
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